I’m president of ShareBuilder Advisors, LLC, and whether you're self-employed or have 1,000+ employees, helping businesses save for retirement is my passion. Better known as ShareBuilder 401K where we’re reinventing how retirement planning can help businesses and their employees save smarter. This blog is dedicated to sharing ideas that can help small and mid-size businesses save for retirement and save on taxes too. I look forward to hearing from you about new retirement strategies that make saving easier and more affordable than ever before.

Solo 401(k) 2012 Deadlines and Tax-Savings Update: How You Can Cut Your Tax Bill by $10,000

Many self-employed and sole proprietors are unaware they can take advantage of an Individual 401(k) plan (aka. a Solo 401(k)) and the substantial tax-deferred benefits these plans offer. The Solo 401(k) is pretty easy and inexpensive to start and delivers saving advantages that help improve an individual’s bottom line too. Solo 401(k) plans are an option for any owner-only business. Multiple owners and spouses can also be included in a Solo 401(k), but if the business adds employees to the 401(k), it will need to convert to a more traditional plan.

The following provides updated tax and savings information from a popular entry I posted here last year. It also includes important plan setup and contribution deadlines for the 2012 calendar year.

One of the great advantages of a Solo 401(k) is the ability to play the roles of both employer and employee, enabling the owner to contribute up to $50,000 of her annual income tax-deferred in 2012 (or $55,500 if at least 50 years of age). That’s a generous amount that might even drop the owner into a more advantageous tax bracket that can fast track the owner’s time to retirement.

The high contribution limits, tax savings and easy access to cash via penalty-free loans make the nominal price for solo 401(k)s a savvy financial move for any owner-only business that wants to save more than $5,000 a year (the traditional IRA limit).

In the past, many owner-only businesses have turned to traditional IRAs as a retirement savings strategy – an approach that, compared to a Solo 401(k), provides much lower contribution limits (not to mention penalties if the owner needed to access the money before reaching retirement age). Solo 401(k)s also offer more flexibility than about any retirement option. In 2012 for example, just compare a 401(k) to a traditional IRA:

* Amount you can contribute starts phasing out at $110K and not allowed if making $125K or more.

FYI, the annual limit increases to $51,000 in 2013, or $56,500 if at least 50 years of age. IRA tax-deferral limit is also increasing $1,000, so it will have a $6,000 limit in 2013. Given the current discussions on potential tax increases for 2013 going on in DC, a Solo 401(k) may continue to become even more advantageous.

The amount you can tax-defer will vary by your earnings and your tax rate. In general, for those earning $165,000 or more, protecting $10K or more in taxes is often doable. For those earning less, the tax savings can still be quite substantial. Here’s how an owner under 50 years of age can max out his or her retirement savings and lower taxes for 2012:

While the owner earned $165,000 in 2012, only $115,000 is taxable by Uncle Sam. Assuming an adjusted gross income (AGI) tax rate of 20 percent, that’s $10,000, she can now keep for herself (versus paying the taxman) in 2012. In actuality, the tax savings is likely to be even greater as she may also drop a tax bracket. For example, the married filed jointly 2012 tax rate increases from 25 percent to 28 percent for income over $142,700.

Must Start a Solo 401(k) by December 31, 2012 to Qualify – Have until April 15th to Contribute

While business owners will have until their tax deadline to contribute to their 401(k) accounts, IRS rules require that their plans must be setup by December 31st to qualify. Many providers have deadlines well before this date, so setting up sooner rather than later is a smart way to go.

Most businesses will likely have until April 15, 2012 to make contributions for 2012. But if the company is established as a corporation, the deadline will be March 15. The good news is that, by setting up a plan by the end of the year, businesses will have plenty of time to determine the optimal amount they can save to best manage their tax and retirement savings.

One last thing to know: If loan and Roth options are important to you, be sure to setup a full-featured, fully administered Solo 401(k) plan.Some providers offer a record-keeping-only individual 401(k) that will likely offer more investment options, but will lack Roth and loan options.

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